Guru Investment Theses on Herbalife Ltd

Bill Ackman Comments on Herbalife - Dec 09, 2016

On November 1, 2016, Herbalife (NYSE:HLF) reported its third quarter financial results. Modest financial performance in the quarter, disappointing 2017 guidance and the unexpected announcement of a CEO transition caused the stock to decline. HLF stock has traded down more than 33% since the announcement of the company’s settlement with the FTC on July 15th, 2016, a 15% year-to-date decline, as investors have come to increasingly ignore the company’s fraudulent characterization of the FTC settlement. At its December 2, 2016, price of $47.99 per share, HLF currently trades at approximately the price at which we shorted the shares in 2012.

On a consolidated basis the company reported net sales of $1.1 billion for the quarter, up 1.7% year-over-year. Headline adjusted net income of $105 million for the quarter (down 3% YoY) translated into adjusted EPS of $1.21 (down 4% YoY). On a constant currency basis the company reported net sales growth of 5%, driven by EMEA (+15%), Mexico (+14%) and North America (+10%).

The deceleration of Herbalife’s China business during the quarter is notable. Once a high-flying growth market (regularly posting 20-30%+ top-line growth), the China business has slowed in recent quarters, achieving modest 1% currency-adjusted, year-over-year top-line growth in Q3 (or negative 5% on actual basis).

Along with earnings, Herbalife announced that Michael Johnson is slated to transition to Executive Chairman in June 2017 at which point Rich Goudis, the current COO, will take over as CEO. Goudis has been largely absent from the public eye in recent years.

Since HLF’s earnings call, two other notable events have taken place. First, on November 6th, John Oliver’s Last Week Tonight aired a 32-minute segment on multi-level-marketing companies with a focus on Herbalife. In his typically colorful style, John Oliver points out the hypocrisy and fraud inherent in Herbalife’s business and shines a spotlight on how the company harms hundreds of thousands of people every year. You can watch his scathing take-down of HLF here. To date, the John Oliver segment has been viewed on YouTube more than 8 million times including over 1.7 million views of the Spanish-language version representing about 11% of the Hispanic households in the U.S. These 8 million views are in addition to the 4.1 million viewers of Oliver’s show on HBO and millions more on Facebook.

Second, on November 7, 2016, the documentary film “Betting on Zero” secured distribution rights, which will include a 30 or so city theatrical release in early 2017 and online video-on-demand dissemination thereafter. We believe that the John Oliver segment and the wide distribution of the film are materially positive developments which will help elevate the Herbalife story beyond traditional financial news media.

Despite its weak financial outlook, Herbalife is trading at $47.99 or about 10 times the midpoint of management’s new 2017 guidance ($4.60 - $5.00). Importantly, however, this guidance does notassume a significant disruption in Herbalife’s U.S. business. We believe the negative earnings impact is likely to be substantial as the U.S. accounted for ~23% of Herbalife’s contribution margin this past quarter (a measure of profitability before general selling and administrative expenses), and a substantially higher portion of earnings when giving consideration to the inherent operating leverage of the business.

Furthermore, Herbalife’s “definition” of earnings continues to exclude certain items which we believe are actual ongoing costs of the business but which Herbalife adds-back (including ~$0.46 for “non-cash interest expense”). This excludes additional fines and/or injunctive relief that may arise from other regulatory agencies. On a pro-forma basis, assuming a modest decline in the U.S. business and expensing the add-backs, we estimate Herbalife is currently trading at 12 to 15 times 2017 pro forma earnings (and a potentially much higher multiple depending on the magnitude of the impending U.S. decline).

Fundamentally, pyramid schemes are confidence games. The CEO exit, deteriorating earnings, the declining stock price, and the John Oliver segment should materially impact Herbalife distributor confidence. When distributors reduce their purchases and/or leave the company, the financial results of the company should decline on an accelerated basis. Furthermore, we believe the injunctive relief demanded by the FTC is likely to significantly impact Herbalife’s financial performance beginning in the second quarter of 2017. Coupled with decelerating growth in many international markets, especially in China, we expect earnings to decline in 2017. We remain short Herbalife because we believe its intrinsic value is zero.

Bill Ackman Comments on Herbalife - Aug 29, 2016

We have made substantial progress with our short position in Herbalife (NYSE:HLF). On July 15, 2016, after a more than two-year investigation, the FTC found that Herbalife has been operating illegally, misleading consumers about the potential profitability of its so-called business opportunity, among other extremely critical findings. The FTC's settlement with Herbalife avoided using the words "pyramid scheme" to describe its business, but found that the company had all of the hallmarks of other pyramid schemes it has prosecuted recently. The FTC's findings confirm each of our principal allegations against the company.

The FTC stated that it chose to settle with Herbalife to avoid an extended period of litigation and to bring relief to consumers more rapidly. While Herbalife has to-date successfully spun the terms of the settlement as a victory for the company, the facts speak differently as the market appears to have recently begun to understand. While Herbalife stock rose more than 20% on the initial announcement of the settlement, it has declined since that time, and is now trading at approximately the same price as before the announcement.

Under the terms of the FTC settlement, the company is being required to totally restructure its business and compensate its distributors only for "profitable retail sales" to consumers who are not distributors pursuing the business opportunity (other than for a limited carve out for personal consumption of the product by distributors). In light of the fact that the FTC found little if any evidence of profitable retail sales, it is difficult to understand how the company can continue to motivate and recruit distributors to replace the more than 2,000,000 who quit each year when these aspiring distributors realize they cannot make money. As a result, we expect Herbalife to collapse as distributors leave as a result of the newly restructured compensation arrangements and required changes in marketing practices. While it is difficult to estimate a precise time frame for the company's demise, we believe it will not be years. We have already described the Complaint and Settlement Agreement in detail during our July 20, 2016 conference call and presentation which is available on the PSH website, www.pershingsquareholdings.com. In summary, the FTC fmdings make clear that Herbalife is a pyramid scheme.

A comparison of the FTC's fmdings about Herbalife with previous FTC pyramid scheme prosecutions reveals similar and often nearly identical language. The FTC Complaint alleged that Herbalife participants are "primarily compensated for successfully recruiting" new participants and not for selling products, the defming attribute of a pyramid scheme which has been alleged in each of the most recent FTC pyramid scheme cases. Exhibit I, which starts on page 32 of this report, compares the FTC's allegations against Herbalife and other companies the FTC deemed to be pyramid schemes. Most notably, the count against Herbalife for Unfair Practices closely mirrors the Illegal Pyramid counts in previous cases. It is clear from Exhibit I that the FTC found Herbalife to be an illegal pyramid scheme and alleged the necessary fmdings to support that charge but, as part of the settlement, agreed to avoid using the phrase "pyramid scheme." FTC Chairwoman Ramirez's public comments corroborate this conclusion.

We believe the implementation of the Settlement Agreement — the most comprehensive business model reform required by the FTC against any multi-level marketing company — will cause Herbalife's U.S. business to collapse and contribute to the eventual failure of the entire company. The settlement represents Herbalife's agreement to engage in a "top to bottom' restructuring of its business model in the United States. Key elements include:

Compensation to distributors is limited to verifiable, "Profitable Retail Salesn

Present compensation levels remain only if 80% or more of U.S. sales are verifiable, "Profitable Retail Sales";

At least two-thirds of rewards paid by Herbalife to distributors must be based on Profitable Retail Sales of Herbalife products that are tracked and verified;

Qualification purchases are prohibited;

Misleading income claims are prohibited; and

An Independent Compliance Auditor will be hired to oversee compensation plan changes for a period of seven years.

Since the day of the FTC settlement announcement, Herbalife has orchestrated a coordinated media campaign to misrepresent the findings of the FTC and the inevitable business impact of the relief demanded by the FTC.

On August 3, 2016, Herbalife reported its second quarter financial results. On the conference call, Herbalife management was consistently upbeat and bullish on the prospects for the business in the face of the FTC settlement, noting "these changes are good for our company," and "we have the greatest confidence in our ability to comply with the agreement and continue to grow our business in the U.S. and around the world." Management's latest commentary is a continuation of prior misrepresentations.

Herbalife's 10Q provided revised disclosure pertaining to the FTC settlement and updated risk disclosures. It struck a more balanced, and at times cautionary, tone compared with management commentary on the call, noting that "there is no guarantee that we will be able to fully comply with the Consent Order," and "Nile impact of the Consent Order on our business ... could be significant." All the same, the 10Q reiterated that Herbalife "neither admitted nor denied the allegations in the FTC's complaint' in agreeing to the terms of the Consent Order," and repeated the company line that "we do not believe the Consent Order changes our business model as a direct selling

company." The 10Q included new language noting that the Consent Order does not prevent "other third-parties from bringing actions against us, whether in the form of other state, federal or foreign regulatory investigations or proceedings, or private litigation, any of which could lead to, among other things, monetary settlements, fines, penalties or injunctions."

At a minimum, we believe the injunctive relief demanded by the FTC is likely to significantly weigh on Herbalife's financial performance in the coming quarters. Moreover, we believe that the FTC complaint and settlement provide a roadmap for other state Attorneys General and regulators in 93 other countries around the world to seek similar relief and to enforce similar protections for their consumers.

Despite a bleak financial outlook, Herbalife is trading at —13.5x the midpoint of management's revised 2016 guidance ($4.50 to $4.80) or —16 times 2016 guidance excluding certain items (which we believe are ongoing costs to the business but which Herbalife management inappropriately adds back). The implied multiple represents an even higher multiple of 2017 earnings, as Herbalife's future earnings are likely to be significantly lower as changes to the business model reduce the company's earnings power. These estimates exclude additional fines and/or the impact of additional injunctive relief that may arise from other regulatory agencies.

Herbalife stock price hit a recent high in the low $70s per share on the day of the settlement, but has declined to less than $62 currently. Putting aside the short case for Herbalife, it has become extremely difficult to comprehend the logic behind the bull case on Herbalife.

The bulls had believed that the FTC settlement would exonerate the company and otherwise not require any material changes to the company's business practices. This is defmitively false based on the FTC Settlement and Order.

Second, the bulls believed that the company would announce a large leveraged recap at the time of a settlement. When pressed about buybacks on the recent earnings call, the CFO demurred and reminded investors about the maturity of its credit facility in March 2017 and the $1.15 billion out-of-the-money convertible debt issue which is due within three years. We do not believe that banks and/or bondholders are likely to be willing to provide a material amount of debt financing to Herbalife in light of the FTC findings, and without knowing the revenues, earnings, and cash flow implications of the FTC's required business changes, which will not be fully implemented until May of next year.

Third, China, which has been the growth engine of the company in recent years, showed dramatically decelerated growth for the quarter calling into question its sustainability. Herbalife management stated that investors are likely to see "a significantly lower growth rate going forward" and that they do not believe China's growth rate is "sustainable at the current levels."'

Fourth, long-only institutional investors appear to be exiting, with Fidelity, a long-time shareholder selling nearly 40% of its holdings as disclosed in its recently updated 13G filing. Fidelity will not be required to notify the market of additional sales until mid-November. Capital Research has also been a substantial seller. In light of the FTC's findings of wrongdoing, we do not believe that legitimate institutional investors will continue to own Herbalife. The substantial majority of other holders appear to be fast-money investors who we believe mistakenly bought on the announced settlement, betting on a buyback, when more than 50% of the float on that day changed hands at prices nearly 20% above current levels.

Lastly, at current prices it is difficult to make a compelling argument for owning Herbalife even if one does not believe it is a pyramid scheme. The stock trades at about a 50 percent multiple premium to legitimate supplement retailers like GNC, which, unlike Herbalife, is not being required to completely change the way it compensates its distributors as well as its marketing practices.

While it has been a long road, we see multiple paths to an eventually successful outcome with this investment.

Bill Ackman Comments on Herbalife - May 11, 2016

On May 5th, Herbalife (NYSE:HLF) reported improved financial performance for the first quarter of the year and updated their regulatory disclosures as follows:

“The Company is currently in discussions with the FTC regarding a potential resolution of these matters. The possible range of outcomes include the filing by the FTC of a contested civil complaint and further discussions leading to a settlement which would likely include a monetary payment and injunctive and other relief. The Company is cooperating with the investigation and at this time it is difficult to predict the timing, and the likely outcome, of these matters. The discussions with the FTC are in the advanced stages, but there are still a number of material open issues that could preclude reaching final agreement. If discussions with the FTC do not continue to progress, it is likely that litigation would ensue. Although we are confident in our legal position, litigation outcomes by their very nature are difficult to predict and there can be no assurance of a particular outcome.

“The outcome of these matters with the FTC, whether by mutual resolution or through litigation, could have a material adverse impact on the Company’s business operations, its results of operations or its financial condition. The Company believes it is reasonably possible that it may have incurred a loss.

At the present time, the Company’s best estimate of the payment amount that would be made by the Company under a mutual resolution with the FTC is $200 million. The Company has not accrued any amounts with respect to any potential monetary payments relating to this matter. If a resolution is not attained and litigation ensues, the Company is unable to estimate a range of potential loss, if any, relating to these matters.”

The company’s language provides greater specificity and introduces a narrower range of outcomes versus the company’s 10-K, filed on February 25th, which stated:

“The possible range of outcomes include the filing by the FTC of a contested civil complaint, further discussions leading to a settlement which could include a monetary payment and other relief or the closure of these matters without action.”

It is notable that the company removed the “closure of these matters without action” language from the recent 10-Q.

Investors reacted favorably to the company’s disclosure apparently focusing on the modest size of Herbalife’s estimate of the monetary portion of the settlement, less than two quarters of earnings, suggestive of an overall settlement that would be no more than a “slap on the wrist.” While a $200 million settlement would be one of the highest ever in an FTC consumer protection action, it would be immaterial to Herbalife. Investors, however, appear to ignore the fact that the company may not be able to settle with the FTC, and instead, will be sued by the FTC for being a pyramid scheme, or, alternatively, that a settlement’s “injunctive and other relief” may materially impair HLF’s future profitability and growth potential.

Recently, the FTC obtained significant injunctive and other relief in its Vemma pyramid scheme litigation, which, we believe, if applied to Herbalife would significantly harm the company’s ability to operate profitability. We expect the FTC to demand similar safeguards and restrictions for Herbalife as it has required in the Vemma case.

On the evening of May 6th, shortly after HLF’s press statement about a possible resolution with the FTC and the stock price’s substantial increase, Justin Cole, the FTC’s Director of the Office of Public Affairs, provided an on-the-record statement to the media:

“Injunctive relief can be just as significant as the money obtained for consumers and even more influential on a company’s future operations.”

We believe it is very unusual for the FTC to respond to a public company’s characterization of settlement negotiations. The FTC’s reaction may signal its concern that Herbalife or investors are minimizing the significance of potential injunctive relief. The key question is what “injunctive and other relief” may be. We expect that the relief imposed by the FTC will require modifications to HLF’s business practices which will be materially adverse to HLF.

The company reported net sales of $1.12 billion for the quarter, up ~1% year-over-year (after the impact of FX), off a relatively easy comp, beating management’s and analysts’ guidance by 6% and 4%, respectively. A combination of better-than-expected volume growth and a less severe FX environment contributed to this result. China (+39%) and EMEA (+17%) continue to be the strongest regions. Notably, North America (+9%) posted its best quarter since Q1’2014. Driven by higher-than-expected volume and net sales, Net Income grew ~7% year-over-year (“YoY”) and adjusted EPS was up ~5%.

From a cash flow perspective, results were less favorable, as operating cash flow and free cash flow declined ~12% and ~20% YoY, respectively. Total cash on HLF’s balance sheet decreased 13% to $774 million after the company paid down $230 million of debt in the quarter as requiredend, at which point HHC will begin to generate a significant amount of cash flow from condo closings. Anaha, a 317-unit project, is expected to be completed by the summer of 2017. In February 2016, HHC began construction of Ae’o, the third of four mixed-use residential towers planned for the first phase of the Ward Village development. Whole Foods has pre-leased a substantial portion of the retail space at the base of this tower, which is scheduled for completion in 2018. The fourth condo tower, the 424-unit Ke Kilohana, sold 90% of its units in five days (in April 2016). Ke Kilohana is a workforce residential tower with 375 of its units designated for local residents.

Bill Ackman Comments on Herbalife - May 11, 2016

On May 5th, Herbalife (NYSE:HLF) reported improved financial performance for the first quarter of the year and updated their regulatory disclosures as follows:

“The Company is currently in discussions with the FTC regarding a potential resolution of these matters. The possible range of outcomes include the filing by the FTC of a contested civil complaint and further discussions leading to a settlement which would likely include a monetary payment and injunctive and other relief. The Company is cooperating with the investigation and at this time it is difficult to predict the timing, and the likely outcome, of these matters. The discussions with the FTC are in the advanced stages, but there are still a number of material open issues that could preclude reaching final agreement. If discussions with the FTC do not continue to progress, it is likely that litigation would ensue. Although we are confident in our legal position, litigation outcomes by their very nature are difficult to predict and there can be no assurance of a particular outcome.

“The outcome of these matters with the FTC, whether by mutual resolution or through litigation, could have a material adverse impact on the Company’s business operations, its results of operations or its financial condition. The Company believes it is reasonably possible that it may have incurred a loss.

At the present time, the Company’s best estimate of the payment amount that would be made by the Company under a mutual resolution with the FTC is $200 million. The Company has not accrued any amounts with respect to any potential monetary payments relating to this matter. If a resolution is not attained and litigation ensues, the Company is unable to estimate a range of potential loss, if any, relating to these matters.”

The company’s language provides greater specificity and introduces a narrower range of outcomes versus the company’s 10-K, filed on February 25th, which stated:

“The possible range of outcomes include the filing by the FTC of a contested civil complaint, further discussions leading to a settlement which could include a monetary payment and other relief or the closure of these matters without action.”

It is notable that the company removed the “closure of these matters without action” language from the recent 10-Q.

Investors reacted favorably to the company’s disclosure apparently focusing on the modest size of Herbalife’s estimate of the monetary portion of the settlement, less than two quarters of earnings, suggestive of an overall settlement that would be no more than a “slap on the wrist.” While a $200 million settlement would be one of the highest ever in an FTC consumer protection action, it would be immaterial to Herbalife. Investors, however, appear to ignore the fact that the company may not be able to settle with the FTC, and instead, will be sued by the FTC for being a pyramid scheme, or, alternatively, that a settlement’s “injunctive and other relief” may materially impair HLF’s future profitability and growth potential.

Recently, the FTC obtained significant injunctive and other relief in its Vemma pyramid scheme litigation, which, we believe, if applied to Herbalife would significantly harm the company’s ability to operate profitability. We expect the FTC to demand similar safeguards and restrictions for Herbalife as it has required in the Vemma case.

On the evening of May 6th, shortly after HLF’s press statement about a possible resolution with the FTC and the stock price’s substantial increase, Justin Cole, the FTC’s Director of the Office of Public Affairs, provided an on-the-record statement to the media:

“Injunctive relief can be just as significant as the money obtained for consumers and even more influential on a company’s future operations.”

We believe it is very unusual for the FTC to respond to a public company’s characterization of settlement negotiations. The FTC’s reaction may signal its concern that Herbalife or investors are minimizing the significance of potential injunctive relief. The key question is what “injunctive and other relief” may be. We expect that the relief imposed by the FTC will require modifications to HLF’s business practices which will be materially adverse to HLF.

The company reported net sales of $1.12 billion for the quarter, up ~1% year-over-year (after the impact of FX), off a relatively easy comp, beating management’s and analysts’ guidance by 6% and 4%, respectively. A combination of better-than-expected volume growth and a less severe FX environment contributed to this result. China (+39%) and EMEA (+17%) continue to be the strongest regions. Notably, North America (+9%) posted its best quarter since Q1’2014. Driven by higher-than-expected volume and net sales, Net Income grew ~7% year-over-year (“YoY”) and adjusted EPS was up ~5%.

From a cash flow perspective, results were less favorable, as operating cash flow and free cash flow declined ~12% and ~20% YoY, respectively. Total cash on HLF’s balance sheet decreased 13% to $774 million after the company paid down $230 million of debt in the quarter as requiredend, at which point HHC will begin to generate a significant amount of cash flow from condo closings. Anaha, a 317-unit project, is expected to be completed by the summer of 2017. In February 2016, HHC began construction of Ae’o, the third of four mixed-use residential towers planned for the first phase of the Ward Village development. Whole Foods has pre-leased a substantial portion of the retail space at the base of this tower, which is scheduled for completion in 2018. The fourth condo tower, the 424-unit Ke Kilohana, sold 90% of its units in five days (in April 2016). Ke Kilohana is a workforce residential tower with 375 of its units designated for local residents.

Bill Ackman Comments on Herbalife Short - Dec 16, 2015

Our thesis on HLF remains unchanged. We believe that Herbalife will ultimately be subject to regulatory action or will collapse because of fundamental deterioration in its business which relies on the continual recruitment of new victims. During the quarter, the potential for regulatory action increased while business fundamentals deteriorated.

From a regulatory perspective, we view the Complaint that the FTC filed on August 17th against Vemma Nutrition Company (“Vemma”), another MLM whose structure is similar to HLF’s, as a very positive development. The preliminary injunction issued against Vemma on September 18th is likely to make Vemma’s business totally unviable and provides a template for claims the FTC could bring against Herbalife.

On October 27th, New York State Senator Jeff Klein, working with Public Advocate Letitia James and a non-profit community group called Make The Road New York, released a critical report on Herbalife titled: "The American Scheme: Herbalife's Pyramid Shakedown". Based on its hidden camera investigations of more than 60 nutrition clubs located in New York City, the report concluded that Herbalife distributors are “running an illegal pyramid scheme.” The report was supported by data from 56 victims who individually lost as much as $100,000. On December 9th, Sen. Klein held a public roundtable to advance his campaign to stop Herbalife’s deceptive tactics. Senator Klein has proposed New York State legislation that would amend the New York State General Business Law to better protect New York State residents.

Despite predictions from Herbalife supporters that regulatory investigations would end during the quarter, they appear to have intensified. The company has now spent a total of $101 million defending itself, including $11.2 million in the quarter. Expenses related to “responding to governmental inquiries” increased from $5.8 million last quarter to $7.6 million this quarter which reflects the growing intensity of ongoing investigations. Assuming Herbalife is spending about $500 per hour on lawyers, $ 7.6 million represents 15,200 hours of legal time during the quarter, or 168 hours of legal time per day, seven days per week.

Herbalife’s fundamentals continued to decline during the quarter. Notably “total members” – perhaps Herbalife’s most important operating metric – declined from 4.1 million in the second quarter to 4.0 million in third quarter indicating that Herbalife churned through at least 500,000 members as the rate of member churn exceeded Herbalife’s ability to find new victims.3 On its conference call, the company also began using a new operating metric called ‘active members,’ suggesting that Herbalife concedes that a proportion – we expect, a large proportion – of its members are inactive. In our experience, companies that change the standards by which they measure themselves do so only when the old metric shows business deterioration that they would rather not disclose.

With respect to third quarter earnings, Herbalife posted weak revenues, but was able to reduce or defer certain expenses in order to generate earnings that exceeded analyst estimates. Among other questionable add-backs, Herbalife excludes regulatory and costs to “defend its business model” from its earnings estimates despite the fact that these expenses are likely to continue. On a consolidated basis, the company reported net sales of $1.1 billion, down 12% year-over-year, which was worse than Street expectations and below management guidance. The negative variance was largely attributable to foreign exchange headwinds. Similar to last quarter, China continues to be the key driver of Herbalife’s growth. While China’s year-over-year growth was 25%, Herbalife China revenues declined 5% when compared to the previous quarter.

Notably, HLF’s South Korean market continued to show substantial deterioration in the quarter. South Korea has been one of Herbalife’s largest markets and a significant driver of the company’s revenue and earnings growth. Over the last several years, South Korea has been Herbalife’s third or fourth largest market and one of its most profitable with approximately 56% contribution margins versus 43% for the rest of the company. Beginning a year ago, Herbalife Korea began to decline. This deterioration accelerated notably this quarter, down 39% versus last year on a constant-currency basis, and down 46% on an actual basis.

While management continues to blame the decline in Korea on “changes in the business model,” to us this looks like the classic “pop-and-drop” that is pervasive in pyramid schemes, a phrase that CEO Michael Johnson previously used to describe Herbalife’s rapid growth and inevitable decline in certain geographical regions. If one is looking for obvious evidence that Herbalife is a pyramid scheme, one need only look at the massive growth and rapid decline of Herbalife’s South Korea business and compare it with Unilever or another legitimate consumer packaged goods company.

Bill Ackman Comments on Herbalife Short - Sep 11, 2015

Despite the substantial increase in HLF’s share price year to date, we remain confident that HLF is an unlawful pyramid scheme that will eventually be shut down by regulators or collapse on its own.

The increase in the stock price appears to have been driven by HLF beating its recently reduced earnings guidance, and statements by some HLF analysts suggesting that the company has resolved its SEC issues and is close to settling with the FTC (supposedly later this summer). We believe the SEC, the FTC, Department of Justice, FBI, and State AGs continue to have active investigations of the company that are unlikely to be resolved favorably in the short term. In recent months, the Department of Justice has sought information from the company, distributors and third parties through the issuance of subpoenas.

The company’s recent 10Q filing appears to confirm the ongoing regulatory actions, disclosing that expenses for “defending its business model” and “responding to regulatory inquiries” increased by approximately two-thirds to a total of $13 million. HLF has now spent approximately $90 million defending itself, costs which it adds back to its “Adjusted Earnings” as “non-recurring,” but which we expect will continue until the company is shut down or collapses on its own.

In its 10Q filed on August 5, 2015, HLF disclosed that net sales year-over-year declined in every separately reported region except China. North America sales fell 8.2%, South and Central America fell 34.3%, and Europe Middle East and Africa fell 14.7%. Excluding the impact of China, consolidated net sales would have declined 19%. Most of HLF’s markets also experienced declines on a currency-adjusted basis. For example, local currency sales declined 30% in South Korea, 33% in Malaysia, and 21% in the United Kingdom.

The rapid declines in nearly all of Herbalife’s markets are consistent with a pyramid scheme’s ‘pop-and-drop’ as markets become saturated. China continues to be the core driver of growth. Sales in China increased 38% and have now surpassed the U.S. as HLF’s largest market. We believe that HLF’s China business violates local anti-MLM laws, which are the strictest in the world. For more information on HLF’s Chinese violations of law, we encourage you to review our March 2014 presentation on “Herbalife in China” available at www.FactsAboutHerbalife.com.

Herbalife is now guiding to adjusted earnings per share of $4.50-$4.70 for 2015, approximately 30% lower than analyst expectations a year ago. At its recent share price of ~$60, Herbalife trades at 13 times earnings multiple, above its approximate 12 times historical average. A $60 stock price effectively assigns no weight to the potential for regulatory intervention or market saturation and collapse. Furthermore, a substantial majority of Herbalife’s sales are exposed to emerging markets around the world that are experiencing dramatic currency declines and economic deterioration due to falling oil and commodity prices. When this is considered along with Herbalife’s dependence on China for growth, we find the current stock price substantially overvalued on a fundamental basis even if one were to assume the company is operating legally in all respects.

Top Ranked Articles about Herbalife Ltd

On November 1, 2016, Herbalife (NYSE:HLF) reported its third quarter financial results. Modest financial performance in the quarter, disappointing 2017 guidance and the unexpected announcement of a CEO transition caused the stock to decline. HLF stock has traded down more than 33% since the announcement of the company’s settlement with the FTC on July 15th, 2016, a 15% year-to-date decline, as investors have come to increasingly ignore the company’s fraudulent characterization of the FTC settlement. At its December 2, 2016, price of $47.99 per share, HLF currently trades at approximately the price at which we shorted the shares in 2012. Read more...

The All-in-One Screener can be used to find insider buys and sells over the last week by clicking on the Insiders tab and changing the settings for All Insider Buying to “$200,000+” duration to October 2016 and November 2016 and All Insider Sales to “$5,000,000+”. Read more...

We do not know when our individual stocks, or even whole markets, will get whacked again. Nor do we know by how much. But we can be certain major reversals or corrections will happen sooner or later to many holdings. Read more...

Carl Icahn (Trades, Portfolio) solidified his unbelief in Pershing Square investor Bill Ackman (Trades, Portfolio)’s negative thesis on Herbalife two weeks ago when he added several million more shares to his long position in the company. Friday, he intensified the battle by slightly raising his bet on the nutrition multi-level marketer again. Read more...

We have made substantial progress with our short position in Herbalife (NYSE:HLF). On July 15, 2016, after a more than two-year investigation, the FTC found that Herbalife has been operating illegally, misleading consumers about the potential profitability of its so-called business opportunity, among other extremely critical findings. The FTC's settlement with Herbalife avoided using the words "pyramid scheme" to describe its business, but found that the company had all of the hallmarks of other pyramid schemes it has prosecuted recently. The FTC's findings confirm each of our principal allegations against the company. Read more...

During his conference call this morning, Bill Ackman (Trades, Portfolio) presented on Herbalife’s settlement with the Federal Trade Commission. After summarizing background information of the case, Ackman discussed the implications of the settlement based on three complaint categories. Read more...

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